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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

OR

For the transition period from              to             

Commission File Number 0-23223

CURAGEN CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (203) 401-3330

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

Preferred Stock Purchase Rights

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes  x No  ¨

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in determining such value is an affiliate) computed by reference to the average bid and asked price of the common stock, as of the last business day of the registrant’s most recently completed second fiscal quarter, was $265,463,470.

The number of shares outstanding of the registrant’s common stock as of March 1, 2005 was 50,712,617.

Documents Incorporated by Reference

The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2004. Portions of such proxy statement are incorporated by reference into Part III of this report.

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CURAGEN CORPORATION

FORM 10-K

INDEX

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PART I

The following Business Section contains forward-looking statements, which involve risks and uncertainties. The registrant’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors. See also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors”.

BUSINESS

Overview

We are a genomics-based pharmaceutical development company dedicated to improving the lives of patients by developing novel protein, antibody and small molecule therapeutics in the areas of oncology, inflammatory diseases, and diabetes. We have taken a systematic approach to identifying and validating the most promising therapeutic targets from the human genome. We use internal resources to develop our potential protein therapeutics and have established development alliances with Abgenix, Inc. (“Abgenix”) to support antibody projects, Bayer AG (“Bayer”) to support small molecule projects for diabetes, TopoTarget A/S (“TopoTarget”) to support small molecule histone deacetylase (“HDAC”) inhibitor projects for oncology and inflammatory diseases, and Seattle Genetics, Inc. (“Seattle Genetics”) to support antibody-drug conjugate projects.

Strategy

We hope to generate value for our shareholders by focusing our resources on developing genomics-based therapeutics to improve the lives of patients. We are striving to become profitable by commercializing a subset of therapeutics stemming from our development pipeline, and establishing partnerships with pharmaceutical and biotechnology companies for the development and commercialization of other therapeutics from our development pipeline.

Drug Development Approach

We have taken a systematic approach to identifying and validating the therapeutic targets we believe to be the most promising from the human genome. By leveraging our technology and informatics foundation, we have identified 8,000 genes, both novel and known, with the potential to be targets for therapeutic drug development. Based on disease associations in cellular and animal models, we have qualified 500 of these targets as possibly playing a role in disease. By evaluating the relative medical need, biology, speed of path to patients, and strength of intellectual property position of these targets, we have selected our priority projects for development.

As our pipeline of priority projects has matured over the past few years, we have decreased our early-stage target discovery efforts and focused our resources on the advancement of our pipeline of potential protein, antibody, and small molecule therapeutics through clinical development. We have 5 priority projects of protein, antibody, and small molecule therapeutics in preclinical and clinical development across the therapeutic areas of oncology, inflammatory diseases, and diabetes.

Protein Therapeutics

Proteins are molecules composed of amino acids found in the human body. There are many types of proteins, all carrying out a number of different biological functions. Protein therapeutics can treat conditions in which a person is either missing an important protein or would benefit from additional amounts of a given protein. We are applying our genomics expertise and knowledge of disease to develop protein therapeutics in the areas of oncology and inflammatory diseases. We have identified genes whose protein products may make

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suitable therapeutics, have disease associations and are potentially protected by our intellectual property position. We have implemented protocols for the production, purification and testing of our proteins, and have established cell-based assays for characterizing the therapeutic potential of these proteins. Using animal models, we are currently evaluating the activity of a number of proteins as potential human therapeutics. Proteins with activity and favorable toxicity profiles are then selected for clinical development. Our first product to enter into clinical trials was CG53135, also known as Fibroblast Growth Factor 20 (“FGF-20”), a protein therapeutic we discovered, which is being investigated for the prevention and treatment of oral mucositis (“OM”), a side effect experienced by patients receiving radiation and/or chemotherapy for cancer treatment. This product is now in a Phase II clinical trial for the prevention of OM. CG53135 is also active in multiple animal models of inflammatory bowel disease.

Human Monoclonal Antibody Therapeutics

We are applying our genomics expertise and knowledge of disease to develop antibody therapeutics primarily in oncology and inflammatory diseases. We have identified genes that make suitable targets for antibody therapeutics, have disease associations and may be protected by intellectual property rights. We are developing antibody therapeutics with our partner Abgenix, a biopharmaceutical company focused on the discovery, development and manufacturing of human therapeutic monoclonal antibodies. We and Abgenix are evaluating many antibody development programs and we plan on advancing the most promising into clinical development. CR002, our first fully-human monoclonal antibody therapeutic to enter a Phase I clinical trial, has the potential to be a promising treatment for patients with IgA nephropathy, and other diseases such as lupus and diabetes, in which kidney inflammation, when left untreated, may progress to kidney failure necessitating kidney transplantation. We are also evaluating CR011, a fully-human monoclonal antibody-drug conjugate (“ADC”), as a potential treatment for metastatic melanoma, a deadly form of skin cancer, and expect to initiate clinical trials in the first half of 2006.

Small Molecule Therapeutics

We have applied our genomics expertise and knowledge of disease to identify small molecule therapeutics primarily in two disease areas: diabetes and oncology. Our small molecule diabetes program is partnered with Bayer. In this alliance, we intend to co-develop small molecule therapeutics to treat Type 2 (adult onset) diabetes and will co-commercialize resulting products. The first compound resulting from this collaboration is CT052, an orally-administered small molecule that has a potentially novel mechanism of action for treating Type 2 diabetes. We expect to initiate clinical trials with CT052 in the first half of 2006. We are also exploring with TopoTarget the role of HDAC inhibitors, including PXD101, for the treatment of solid and hematologic cancers. Our most advanced small molecule product, PXD101, is in a Phase II clinical trial in patients with advanced multiple myeloma.

Disease Focus

We are focusing our discovery and development efforts on three disease areas that have fast growing markets and large unmet medical needs.

Oncology

Nearly 10 million people throughout the world are diagnosed with cancer each year. The direct and indirect medical costs to treat cancer total more than $180 billion each year, and in the United States alone, cancer takes the lives of 1,500 people on average each day. Most of our protein and antibody therapeutics are being developed to help cancer patients. The first indication being investigated in Phase II for our clinical product, CG53135, is for the prevention of oral mucositis, a side effect experienced by patients undergoing cancer therapy. Our first small molecule HDAC inhibitor, PXD101, is being investigated in Phase II for the treatment of multiple myeloma, and is being evaluated in other solid and hematologic malignancies either alone, or in combination

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with other chemotherapeutic agents. Our first fully-human monoclonal ADC, CR011, is being investigated as a potential treatment for metastatic melanoma, a deadly form of skin cancer, and is expected to enter clinical trials in the first half of 2006. In addition, we are developing several other preclinical protein, antibody, ADC and HDAC inhibitor therapeutics as potential cancer treatments.

Inflammatory Diseases

More than 80 million Americans suffer from major inflammatory diseases. Arthritis, various forms of respiratory inflammation and debilitating inflammatory bowel disease are a daily reality in the lives of millions of individuals. For some sufferers, surgery is an undesirable last resort. However, surgery cannot restore diseased tissue to its previously healthy state. By focusing on the underlying causes of diseases, we are making progress in developing therapeutics to treat the damage caused by inflammatory disorders. CR002, our first fully-human monoclonal antibody therapeutic to enter a Phase I clinical trial, has the potential to be a promising treatment for patients with IgA nephropathy, and other diseases such as lupus and diabetes, in which kidney inflammation, when left untreated, may progress to kidney failure necessitating kidney transplantation.

Diabetes

Approximately 127 million Americans are overweight or obese and 13 million have been diagnosed with diabetes. In the United States alone, the direct and indirect costs related to the treatment of overweight and obese individuals is over $120 billion and of diabetics is over $130 billion. These conditions are reaching epidemic proportions and causing a tremendous burden on the healthcare system. Our collaboration with Bayer is for the development of small molecules for the treatment of diabetes. CT052, a small molecule therapeutic with a potentially novel mechanism of action for treating Type 2 diabetes, represents the first preclinical therapeutic from this ongoing collaboration and is being prepared to enter clinical trials in the first half of 2006.

Clinical Products

CG53135 for oncology support

In 2003, we became one of the first genomics companies to discover, validate, and successfully advance a novel therapeutic candidate from the human genome into Phase I clinical trials when we received U.S. Food and Drug Administration (“FDA”) clearance to begin testing CG53135 in patients. In October 2004, we advanced CG53135 into Phase II with the initiation of a randomized, placebo-controlled, multi-center clinical trial to evaluate its safety and efficacy, following a single-dose, for the prevention of OM for patients receiving high-dose chemotherapy followed by hematopoietic stem cell transplantation (“HSCT”).

CG53135, also known as FGF-20, is a novel investigational protein therapeutic being studied for the prevention and treatment of OM that occurs following exposure to chemotherapy and/or radiation therapy. OM is a side effect that can be experienced by patients receiving radiation and/or chemotherapy for cancer treatment. The condition is characterized by inflammation and ulceration of the tissue lining the mouth and throat leading to bleeding, pain, and difficulty eating and drinking. In addition to leading to debilitating symptoms, OM may result in the interruption of radiation or chemotherapeutic protocols in oncology patients. A therapeutic that could prevent or treat OM successfully would not only mitigate debilitating symptoms, but also may enable cancer patients to receive the optimum dosage of radiation therapy or chemotherapy needed to fight their cancer.

In February 2004, we received orphan drug designation from the FDA for CG53135 in OM, which we believe will help to strengthen the program by offering important clinical development and commercialization benefits. In December 2004, we received Fast Track status from the FDA to investigate CG53135 for the prevention of OM in patients receiving HSCT following myeloablative chemotherapy with or without total body irradiation (“TBI”). The Fast Track program enables a company to file a New Drug Application (“NDA”) on a rolling basis as data becomes available and permits the FDA to review the filing as it is received, rather than waiting for the entire document prior to commencing the review process. With a Fast Track designation, there is

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an opportunity for more frequent interactions with the FDA and the possibility of a priority review, which could decrease the typical review period.

The potency of CG53135 is believed to be due to the molecule’s activity in promoting proliferation of two critical layers of cells (epithelial and mesenchymal) present in the mucosa lining of the mouth and the remainder of a patient’s gastrointestinal tract. The molecule has demonstrated activity in two animal models of OM and the data for these studies was published in the journal Clinical Cancer Research in 2003. In June 2004, we presented animal model data at the 16th Annual International Symposium on Supportive Care in Cancer held by the Multinational Association of Supportive Care in Cancer that highlighted the potential of this molecule and differentiated it from competing products. The data demonstrates that a single-dose of CG53135 administered to animals exposed to chemotherapy, but before the development of active OM, reduces the severity and duration of subsequent OM; and that administration of CG53135 to animals with active OM resulted in a significant reduction in the number of days and severity of OM. This preclinical data supports our strategy to investigate CG53135 as a single dose agent for the prevention of OM and as well as for the treatment of active OM.

Two Phase I trials evaluating the safety and pharmacokinetics of CG53135 for the prevention of OM have been completed. In November 2004, abstracts containing preliminary results from both Phase I trials were published in the proceedings of the 46th Annual Meeting of the American Society of Hematology (“ASH”). In December 2004, data from the Phase I trial on CG53135 for cancer patients undergoing bone marrow transplantation was presented during the ASH conference. Preliminary data on the safety, pharmacokinetics, and potential efficacy of CG53135 on 22 of 30 patients treated with a single-dose of CG53135 suggested that CG53135 was well tolerated with no serious drug-related adverse events noted. Mild-moderate reactions including nausea, vomiting, tachycardia, hypotension, chills, and fever were observed, and infusional reactions in the two patients treated at the highest dose level were considered dose limiting. A total of 18 out of 22 patients (81.8%) did not develop severe grade 3 or 4 OM. Of the four patients experiencing severe grade 3 or 4 OM, all were treated with high dose melphalan, a highly mucosatoxic chemotherapeutic regimen, and the duration of OM was brief (2-5 days) for three of these patients.

In October 2004, we initiated a Phase II trial on CG53135 that is currently enrolling patients in a randomized, placebo-controlled, multi-center study to determine the safety and efficacy of a single-dose of CG53135 to prevent the development of clinically significant OM. Approximately 200 patients in the United States will be randomized to receive a single administration of either placebo or one of three dosage levels of CG53135 immediately after bone marrow transplantation.

A Phase I clinical trial to evaluate the safety and tolerability on CG53135 for the treatment, as opposed to the prevention, of OM is anticipated to be initiated in the first half of 2005. Studies in other clinical indications are planned.

PXD101 for oncology

In June 2004, we added PXD101, a novel HDAC inhibitor, to our pipeline through a license and collaboration agreement with TopoTarget. PXD101 will be investigated as a potential treatment of both solid and hematologic cancers either alone, or in combination with other cancer drugs. The collaboration with TopoTarget also provides us with access to their extensive library of HDAC inhibitor candidates for future commercialization by CuraGen. HDAC inhibitors represent a new mechanistic class of anti-cancer therapeutics that target HDAC enzymes, and have been shown to: arrest growth of cancer cells; induce apoptosis, or programmed cell death; promote differentiation; inhibit angiogenesis; and sensitize cancer cells to overcome drug resistance.

In August 2004, we signed a clinical trials agreement with the National Cancer Institute (“NCI”) that provides us with access to the expertise at the NCI for the design, implementation, and monitoring of clinical trials with PXD101. Under the agreement, the NCI will sponsor several clinical trials evaluating the activity of PXD101, either alone or in combination with other anti-cancer therapies, for the treatment of solid and

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hematologic malignancies. NCI-sponsored clinical trials will occur in parallel to those sponsored by CuraGen, with all data generated available for use in future product registration.

In January 2005, we initiated a Phase II clinical trial evaluating PXD101 on patients with advanced multiple myeloma. This Phase II clinical trial is an open label, multi-center study evaluating the efficacy and safety of PXD101 administered as a single-agent and in combination with dexamethasone, for the treatment of advanced multiple myeloma in patients who have previously failed at least two treatment regimens. The trial is expected to enroll approximately 50 patients at multiple sites in Europe and the United States. Following enrollment, patients will receive 900 mg/m2/day of PXD101 administered intravenously once daily for five consecutive days every three weeks for two cycles. Patients will then be evaluated for tumor response by standard criteria and will either continue receiving up to eight cycles of PXD101 if they demonstrate response or stable disease, or begin combination therapy consisting of PXD101 and dexamethasone. The study is expected to be complete by mid-2006.

CR002 for kidney inflammation

In October 2004, we announced that CR002 received clearance from the FDA to be investigated as a potential treatment for IgA nephropathy. CR002 is a novel fully-human monoclonal antibody being investigated as a potential treatment of kidney inflammation to prevent or slow the progression of IgA nephropathy toward kidney failure. CR002 is designed to block the activity of platelet-derived growth factor D, or PDGF-D, a protein shown to play a role in kidney inflammation. CR002 is the most advanced fully-human monoclonal antibody from our collaboration with Abgenix.

In November 2004, we received orphan drug designation from the FDA for CR002 as a potential treatment to slow the progression of IgA nephropathy and delay kidney failure in patients affected by the disease, which we believe will help to strengthen the program by offering important clinical development and commercialization benefits. In November 2004, we initiated a Phase I clinical trial evaluating the safety and tolerability of CR002 on healthy male volunteers.

Kidney inflammation typically is characterized by a loss of architecture and diminishing function that may eventually lead to kidney failure, necessitating dialysis or kidney transplantation. Kidney inflammation is usually managed clinically by the use of non-specific immunosuppressants, which have variable efficacy and debilitating side effects. A study conducted in an animal model of kidney nephritis, published in the Journal of the American Society of Nephrology in 2003, earned a Congress Award at the 2003 World Congress of Nephrology Meeting. CR002 will be one of the first therapeutics aimed at treating a cause of kidney inflammation.

Pipeline

In addition to our three therapeutics in clinical development, we have two priority projects being advanced through preclinical development and a pipeline of potential protein, antibody and small molecule therapeutics that have been, or are ready to be evaluated in animal studies. The majority of our advanced protein and antibody therapeutics are in the areas of oncology and inflammation, and our small molecules are primarily in the areas of oncology and diabetes. Many of the investigational new drug (“IND”) applications that we anticipate filing in the future will be from our pipeline, and have been or are ready to be evaluated in animal studies.

We anticipate that in the first half of 2006 both CR011, an ADC being investigated as a potential treatment for metastatic melanoma, and CT052, a small molecule therapeutic with a potentially novel mechanism of action for treating Type 2 diabetes stemming from our collaboration with Bayer, will enter into clinical trials.

Collaborations

Our technology and expertise have been used in our partnerships with more than a dozen leading biotechnology and pharmaceutical companies including Biogen, Inc. (“Biogen”), Genentech, Inc. (“Genentech”), GlaxoSmithKline, Inc. (“GSK”), Hoffmann-La Roche Inc. (“Roche”) and Pfizer Inc.

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In addition, we have established a pipeline of potential therapeutics by leveraging the capabilities of industry leaders to more efficiently advance our programs, reduce risk, and conserve resources. We have developed four classes of therapeutics: protein therapeutics which are developed in-house; fully-human monoclonal antibody therapeutics which are developed in collaboration with Abgenix; small molecule therapeutics for oncology and inflammatory diseases which are developed in collaboration with Bayer and TopoTarget; and ADCs which are developed in collaboration with Abgenix and Seattle Genetics.

Abgenix

In December 1999, we entered into a strategic alliance with Abgenix to develop and commercialize genomics-based antibody therapeutics using Abgenix’ XenoMouse^™ technology. This six-year alliance was established initially to identify fully-human antibody therapeutic candidates primarily in oncology. Antibodies determined to have commercial product potential will be allocated between the parties for further development. Under the terms of the agreement, the developing party will pay milestone and royalty payments to the other party for products resulting from this drug development alliance. Potential aggregate milestone payments payable per product launched are approximately $8.5 million. In addition, under the agreement, Abgenix purchased 837,990 shares of our common stock at a price of $17.90 per share for $15.0 million through a private placement.

In November 2000, we expanded our alliance with Abgenix to include the potential for generating fully-human monoclonal antibodies against a larger number of targets and for treating a broader range of complex diseases including autoimmune disorders. As part of this expanded alliance, Abgenix purchased an additional 1,441,442 shares of our common stock at a price of approximately $34.69 per share for $50.0 million through a private placement. Either party can terminate the agreement upon an uncured material breach of contract by the other party, with 30 days written notice. In addition, either party may terminate the agreement upon a breach of certain payment or diligence obligations by the other party if such breach continues, in the case of certain payment obligations, for 10 days and, in the case of certain diligence obligations, for 30 days, after written notice of such breach was provided by the non-breaching party.

Our collaboration with Abgenix has been very productive. Fully-human monoclonal antibodies have been raised against over 20 targets and many of these programs are being evaluated for advancement into cellular and animal validation.

In November 2004, we initiated a Phase I clinical trial with CR002, our leading fully-human monoclonal antibody therapeutic stemming from this collaboration, as a potential treatment for kidney inflammation to prevent or slow the progression of IgA nephropathy toward kidney failure. In October 2004, we announced that CR011, an antibody-drug conjugate, is being advanced toward clinical development with an expected filing of an IND application with the FDA and initiation of clinical trials to occur during the first half of 2006. Our Abgenix collaboration has enabled us to leverage the resources and expertise of one of the world’s leaders in generating fully-human monoclonal antibodies and has fueled our pipeline with a total of five proprietary fully-human monoclonal antibodies whose development we control.

Bayer

In January 2001, we signed two comprehensive agreements with Bayer. As part of these agreements, Bayer purchased 3,112,482 shares of our common stock at a price of $27.31 per share in a private placement totaling $85.0 million.

The first agreement is a comprehensive alliance to discover, develop, and jointly commercialize small molecule therapeutics to treat metabolic disorders, primarily adult onset diabetes. We are to provide therapeutic targets to Bayer and grant Bayer access to our comprehensive suite of functional genomic technologies, bioinformatics and pharmacogenomic expertise to select and prioritize the resulting therapeutics. Bayer will utilize its development expertise to develop small molecule therapeutics against the targets supplied by us. Bayer is responsible under the agreement for funding all high-throughput screening, combinatorial chemistry, medicinal chemistry and pharmacology activities until a designated preclinical stage. Expenses are equally split with Bayer

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for later stage preclinical and clinical compound development to fund the relevant research, development and commercialization activities. If we jointly commercialize any therapeutics resulting from this alliance with Bayer, Bayer will receive 56% of the profits associated with that therapeutic and we will receive 44%. Either party can terminate the agreement upon an uncured material breach of contract by the other party, upon 90 days written notice (30 day notice for payment breach). Bayer may terminate the agreement if there is a change in control involving us, upon providing 90 days written notice to us within 90 days. We may terminate the screening term upon a change in control of Bayer, upon providing written notice to Bayer within 90 days.

Our collaboration with Bayer has been very productive. In October 2004, we announced that the first small molecule compound stemming from this collaboration was advanced to the preclinical stage. CT052 is an orally available small molecule therapeutic being investigated as a potential treatment for Type 2 diabetes. CT052 has a potentially novel mechanism of action for treating Type 2 diabetes and is expected to enter Phase I in the first half of 2006.

The second agreement is a broad, five-year pharmacogenomic and toxicogenomic collaboration. We are applying our functional genomic technologies and pharmacogenomics expertise to evaluate Bayer’s developmental and preclinical pipeline of pharmaceutical compounds across all disease areas. Through the efforts of this collaboration, we and Bayer expect to reduce drug development costs, reduce the time to market, and create safer and more efficacious therapeutics. Either party can terminate upon an uncured material breach of contract by the other party, upon 90 days written notice. In certain circumstances Bayer may terminate the agreement if there is a change in control involving us, upon providing written notice to us within 90 days.

TopoTarget

In June 2004, we signed a license and collaboration agreement with TopoTarget to develop PXD101, a novel HDAC inhibitor for the treatment of solid and hematologic malignancies and identify additional HDAC inhibitors from TopoTarget’s extensive library of compounds.

Under the terms of the agreement, we acquired exclusive rights to develop, and commercialize PXD101 in North America, Asia and all other markets excluding Europe. TopoTarget retains commercialization rights in Europe. During June 2004, we made a $5.0 million equity investment in, and paid a $5.0 million perpetual license fee to TopoTarget. In addition, TopoTarget is eligible to receive up to $10.0 million within a period of 12 months from June 2004 in milestones and research support; $4.0 million over the subsequent 24 months in research support; and up to $27.0 million in additional milestone payments based on successful development, regulatory approval, and commercialization of PXD101. TopoTarget is expected to receive royalties from us based on sales of PXD101 outside of Europe, and we expect to receive reciprocal royalties from TopoTarget based on sales of PXD101 in Europe. We will fund the global development of PXD101. In addition, we have an option to select additional HDAC compounds from TopoTarget for clinical development in oncology and other indications for a take-up fee not to exceed $1.0 million and up to $30.0 million in milestone payments based on successful development, regulatory approval, and commercialization of each additional product. TopoTarget has the option to fund a portion of the global development of PXD101 and additional products in exchange for higher royalties. Potential payments to TopoTarget from us based on the successful development and commercialization of PXD101 and two additional HDAC inhibitor products could exceed $100.0 million.

Either party can terminate the agreement upon an uncured material breach of contract by the other party with 60 days written notice, or if either party files a bankruptcy or insolvency petition which is not dismissed within 60 days of the filing. The three year research program to identify additional HDAC inhibitors from TopoTarget’s library can be terminated by either party upon a change in control of the other party or an uncured material breach in connection with the research program, and by CuraGen after the first year upon payment of a penalty equal to 50% of the unexpended research funding or without penalty if it becomes apparent that a commercially viable future product is unlikely to be identified.

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Seattle Genetics

In June 2004, we announced the licensing of Seattle Genetics’ proprietary ADC technology for use with up to two of our fully-human monoclonal antibodies. We paid an upfront fee of $2.0 million for access to the ADC technology for use with CR011, our first antibody program to utilize this technology. In February 2005, we also exercised our option to access Seattle Genetics’ ADC technology for use with a second antibody program in exchange for a $1.0 million payment.

Seattle Genetics’ ADC technology employs synthetic, highly potent drugs that can be attached to antibodies with their proprietary linker systems. The linkers are designed to be stable in the bloodstream but to release the drug payload under specific conditions once inside target cells, thereby sparing non-target cells many of the toxic effects of traditional chemotherapy. ADCs can increase the therapeutic potential of the many antibodies with targeting ability but limited or no inherent cell-killing activity.

Under the terms of the multi-year agreement, Seattle Genetics may receive up to $28 million in milestone payments assuming successful development of two antibody therapeutics employing ADC technology and will receive royalties on net sales of resulting products. We are responsible for research, product development, manufacturing and commercialization of all products under this collaboration. We also pay maintenance and material supply fees as well as research support payments for ongoing assistance provided by Seattle Genetics in developing ADC products. We may terminate any license under the agreement by providing not less than 90 days prior written notice to Seattle Genetics. In addition, either party can terminate the agreement upon an uncured material breach of contract by the other party with 60 days written notice, or if either party files a bankruptcy or insolvency petition which is not dismissed within 60 days of the filing.

Other

In addition to the above-listed alliances, we have smaller, ongoing collaborative relationships with various pharmaceutical and biotech companies. We have established relationships with more than 100 universities, academic institutions, and individual companies to gain access to disease tissue samples, disease models, and select technologies. We have successfully conducted research with, and have the potential to receive future milestones and royalties from companies including Alexion Pharmaceuticals, Inc., Biogen, DuPont/Pioneer Hi-Bred International, Inc., GSK, Genentech, Roche and its affiliate, Roche Vitamins, Inc. and Millennium Pharmaceuticals, Inc. (formerly COR Therapeutics, Inc.). At present, we do not consider these relationships either collectively or individually to be of a material nature.

Company History

We began operations in 1993, when the massive undertaking to sequence the human genome was just beginning. Our strategy was based on discovering novel ways to combat disease through an understanding of how genes and their resulting proteins function within the human genome. We developed an integrated genomics, proteomics and bioinformatics technology platform that has been used to analyze the human genome, disease models, marketed therapeutics and therapeutic candidates. This approach has led to our discovery of hundreds of disease-related genes, therapeutic targets and potential novel therapeutics. Our platform has been utilized by over a dozen biotechnology and pharmaceutical companies. These collaborations helped validate our technology and have assisted us in developing our own proprietary pipeline of potential therapeutics. We have focused our research efforts on three types of targets: targets that encode protein therapeutics, targets amenable to antibody therapeutic development, and targets amenable to small molecule therapeutic development. As our portfolio has grown, we have started developing protein therapeutics on our own, and transitioned our service-based collaborations towards more strategic research and development alliances that would enable us to leverage the expertise and resources of industry leaders to turn our antibody and small molecule targets into therapeutics. To that end, we established a strategic alliance with Abgenix for the development of fully-human monoclonal antibodies against our proprietary targets, a strategic alliance with Bayer around the development of small molecules directed against our targets in diabetes, a strategic alliance with TopoTarget around the development

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of small molecule HDAC inhibitors for oncology and inflammatory diseases, and a collaboration with Seattle Genetics around the development of ADC products against our proprietary targets. As our pipeline has matured over the past few years, we have decreased our early-stage target discovery efforts and increased resources for the advancement of our pipeline of protein, antibody and small molecule therapeutics into clinical development. Today, we remain one of the leading genomics-based pharmaceutical companies in the industry with two Phase II products in oncology, a Phase I fully-human monoclonal antibody for kidney inflammation and a pipeline of protein, antibody and small molecule therapeutics.

Technology

We have assembled a comprehensive, proprietary, and large-scale platform to understand the human genome and have laid the groundwork to better understand the biology behind disease. Using this foundation, we prioritized promising programs from what we believe to be the remaining intervention points appropriate for the development of novel therapeutics. We identify pharmaceutically relevant genes and proteins and associate them with specific diseases through biological methods that include hypothesis-driven disease models, drug response models, gene and pathway mining approaches, and human genetics. We are developing a pipeline of protein, antibody, and small molecule therapeutics in the areas of oncology, inflammatory diseases, and diabetes.

We have used our proprietary technology to identify the Pharmaceutically Tractable Genome (“PTG”). The PTG is the subset of human genes that we believe will make suitable therapeutic targets either because they are proteins that are shed in the blood and can be targeted by protein and antibody therapeutics, sit on cell surfaces and make suitable antibody and small molecule therapeutics, or belong to intracellular classes of proteins that can be modulated by small molecules. We have identified the roughly 8,000 genes that make up the PTG and have used this foundation to systematically determine which are the most promising ones to develop as therapeutic candidates.

We have established disease programs for the identification of novel, pharmaceutically relevant targets and the association of these targets with specific diseases through process-driven and hypothesis-driven scientific strategies. Once associated with diseases, potential therapeutic target candidates are validated through cellular assays and animal model systems. Information resulting from these efforts is comprehensively managed through our bioinformatics system which is composed of tools and databases that have been designed specifically to manage, organize, and analyze this complementary biological information.

We have used our technologies to complete the world’s first comprehensive protein interaction map for a multicellular organism, Drosophila melanogaster. That achievement was featured on the cover of and published in the December 5, 2003 edition of Science. We also were the first to complete a proteomics map of a eukaryotic organism, yeast (Saccharomyces cerevisiae). That achievement was featured on the cover of and published in the February 10, 2000 edition of Nature. In addition, we have a proprietary set of human protein-protein interaction data. Insight into the highly complex pathways of model organisms’ protein-protein interactions, combined with our proprietary knowledge of human protein-protein interactions, enhances our ability to select promising novel targets for drug development and continues to support our preclinical and clinical development efforts.

Competition

We are subject to significant competition from organizations that are pursuing strategies, approaches, technologies and products that are similar to our own. Many of the organizations competing with us have greater capital resources, research and development staffs and facilities and marketing capabilities. In addition, research in the field of drug development is highly competitive. Our competitors include:

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We compete with biotechnology and pharmaceutical companies that develop, produce and market therapeutic compounds in the U.S., Europe and elsewhere. We face competition from a number of biotechnology and pharmaceutical companies with products in preclinical development, clinical trials or approved for conditions identical or similar to the ones we are pursuing. Other companies and institutions engaged in research and development we face intense competition from include:

The competition listed above was selected based upon identifying those companies that we feel have business models, are developing drugs or have drugs approved for therapeutic indications that are similar to the ones we are pursuing.

A number of our competitors are attempting to rapidly identify and patent genes and gene fragments sequenced at random, typically without specific knowledge of the function of such genes or gene fragments. If our competitors discover or characterize important genes or gene fragments before we do, it could adversely affect any of our related disease research programs. In addition, a number of competitors are producing proteins from genes and claiming both the proteins as potential therapeutics as well as claiming antibodies against these proteins. In many cases generic antibody claims are being issued by the United States Patent and Trademark Office (“USPTO”) even though competitors have not actually made antibodies against the protein of interest, or do not have cellular, animal, or human data to support the use of these antibodies as therapeutics. These claims on proteins as therapeutics and such claims covering all antibodies against the proteins and methods of use in broad human indications are being filed at a rapid rate, and some number of these claims have issued and may continue to issue. We expect that competition in genomics research will intensify as technical advances are made and become more widely known.

Intellectual Property

Our business and competitive position depend on our ability to protect our genomic technologies, gene sequences, the proteins they encode, antibodies raised against them, small molecules, other products, information systems and proprietary databases, software and other methods and technology. We continually file patent applications for our proprietary methods and devices for sequencing, gene expression analysis, discovery of biological pathways and drug screening and development. As of the date of this report, we had been issued approximately 79 patents with respect to aspects of our gene portfolio, products, processes and technologies.

In 2001, the USPTO issued new guidelines for patent applications reflecting its current policy regarding statutory written description and utility requirements for patentability. The implementation of these new guidelines may cause the USPTO initially to reject some of our pending new gene and protein patent applications. Although we believe that we will overcome such rejections to any of our new gene and protein

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cases, there is no guarantee that the USPTO will approve them. We strive especially to gain issued patents for our commercially important genes and proteins. The new guidelines are not expected to impact pending cases directed to technology platforms.

CuraGen^® and other trademarks of CuraGen Corporation mentioned in this report are the property of CuraGen Corporation. Trademarks of 454 Life Sciences Corporation mentioned in this report are the property of 454 Life Sciences Corporation. All other trademarks or trade names referred to herein are the property of their respective owners.

454 Life Sciences Corporation

In June 2000, we announced the formation of 454 Life Sciences Corporation (“454”). This majority-owned subsidiary was initially funded with $40.0 million primarily from investors including us, Soros Fund Management, L.L.C., Cooper Hill Partners, L.L.C., and members of our senior management team. In September 2003, 454 secured an additional $20.0 million in equity financing from us and several existing shareholders, including Cooper Hill Partners L.L.C., to initiate commercialization of 454’s product offering. This second round of financing increased our ownership from 60% to 66%.

This majority-owned subsidiary is commercializing novel nanoscale instrumentation and technologies for rapidly and comprehensively determining the nucleotide sequence of entire genomes—“whole genome sequencing”. 454’s proprietary technology is expected to have widespread applications in industrial processes, agriculture, animal health, biodefense, and human health care, including drug discovery and development, and disease diagnosis. Scientists, using the 454 technology platform, will be able to generate whole genome sequences for a wide variety of viral, bacterial and small fungi organisms. Instead of looking for biologically meaningful regions in one bacterial genome, researchers will have at their disposal multiple strains of an organism for comparison. This will provide information about new pathogens, drug resistant strains and variations in host-pathogen interactions as mutation of pathogens occurs.

454’s technology platform is based on the application of massively parallel approaches to every step of the sequencing process: sample preparation, DNA sequencing, sequence assembly and bioinformatic analysis. This approach, combined with the use of advanced nanotechnology, reduces cost and throughput roadblocks to efficient whole genome analysis. It is 454’s goal to allow entire genomes to be analyzed without the cost and time restrictions normally associated with scaling up current methods of DNA sequencing in large facilities.

In May 2004, 454 received a two-year, $2.4 million federal grant from the National Human Genome Research Institute (“NHGRI”), one of the National Institutes of Health (“NIH”). The grant, entitled “Massively Parallel High Throughput, Low Cost Sequencing” will partially fund the scale up of 454’s technology toward sequencing larger genomes. In October 2004, 454 was awarded a three-year, $5.0 million grant from the NHGRI. The grant, entitled “The 454 Life Sciences Massively Parallel System for DNA Sequencing Technology,” aims to achieve the NIH’s initial goal of reducing the cost of whole mammalian genome sequencing by 100-fold.

Throughout 2004, 454 offered high-throughput sequencing at its Measurement Service Center for the analysis of virus, bacteria and small fungi. In the first quarter of 2004, 454’s proprietary whole genome sequencing technology was used to sequence several strains of Mycobacterium tuberculosis for scientists at Johnson & Johnson Pharmaceutical Research & Development L.L.C. (“J&JPRD”). The resulting sequence was used by scientists at J&JPRD to help understand the basis of tuberculosis drug resistance. An article entitled “A Diarylquinoline Drug Active on the ATP Synthase of Mycobacterium tuberculosis,” was published online in Science Express on December 9, 2004 and printed in the January 14, 2005 edition of the journal Science. The article details the discovery of a potential antimicrobial treatment for tuberculosis against a new target identified with the use of 454’s technology.

In 2005, 454 will offer instrument systems and reagents for purchase by customers who desire high-throughput sequencing without the need and complexity of large-scale robotics. Additionally, 454 will continue scaling its technology to analyze larger model organisms, including human DNA, and develop other genomic applications.

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The operations of 454 are run by a separate management team and governed by a Board of Directors made up of members of our management team and Board of Directors. 454 has also established a Scientific Advisory Board that is comprised of an elite group of scientists in the fields of whole genome sequencing, infectious disease, human genetics, chemical engineering and bioinformatics. As this new technology is commercialized and its applications become accepted across the life sciences industry, we anticipate that 454 will contribute revenue and value to the consolidated entity. See Note 15 to our consolidated financial statements for segment reporting.

Patents and Licenses

454’s products and services are based on the combination of several complex technologies. 454 has developed some of these technologies internally and has pursued patent protection in the U.S. and other countries for certain developments, improvements, and inventions it has developed that are incorporated into 454’s products or that fall within its fields of interest. Other of the technologies of interest to 454 are owned by third parties and are used by 454 under license. The rights that 454 considers important to its current business include patents or patent applications directed to nucleic acid sample preparation and amplification, as well as certain sequencing by synthesis approaches.

From time to time, third parties may assert that 454 is infringing patents owned by such third parties. 454 will endeavor to settle such claims by mutual agreement on a satisfactory basis, which would result in withdrawal of the claim and/or result in the granting of licenses to 454. However, we cannot make any assurances as to the outcome of any future claims.

Government Regulation

Prior to the marketing of any new therapeutic developed by us, or by our collaborators, that new therapeutic must undergo an extensive regulatory review and approval process in the United States and other countries. This regulatory process, which includes preclinical and clinical studies to establish a compound’s safety and efficacy, can take many years and require the expenditure of substantial resources. Data obtained from such studies are susceptible to varying interpretations that could delay, limit or prevent regulatory approval.

The process for new drug approval has many steps, including:

Investigational new drug application.    After most of the pre-clinical testing is completed, an IND is submitted to the FDA before human testing of the drug may begin. Clinical studies may commence 30 days after the FDA has received the IND unless it objects within 30 days. All clinical trials must be conducted in accordance with good clinical practices, (“GCPs”). In addition, an Institutional Review Board, (“IRB”), at each hospital or clinic where the proposed studies will be conducted, must review and approve the study. The IRB also continues to monitor the study for any safety issues. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. In addition, the FDA may, at any time during the 30-day period or at any time thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA. In some instances, the IND application process can result in substantial delay and expense. The IND must contain information, such as:

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Clinical trials.    Clinical trials involve the administration of the drug to healthy volunteers or patients under the supervision of a qualified principal investigator. They must be conducted in compliance with federal regulations and requirements and under established protocols. These protocols detail the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. The study protocol and informed consent information for patients in clinical trials must also be approved by the institutional review board at each institution where the clinical trials are conducted.

Clinical evaluation involves a time-consuming and costly three-phase process. Our studies are being conducted in the following manner:

The FDA, the study sponsor and the institutional review boards reviewing each clinical trial site closely monitor the progress of each of the three phases of clinical trials that are conducted in the United States. They may change or terminate the testing based upon the data accumulated to that point and their assessment of the relative risks and benefits to the patient.

New drug application.    After the completion of the clinical trial phases, and with input from the FDA, a company prepares an NDA for submission to the FDA. The NDA must contain all of the information on the drug gathered to that date, including details on manufacturing and data from the clinical trials.

The FDA does a preliminary review of all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the Federal Food, Drug and Cosmetic Act, the FDA has specified time frames in which to review the NDA and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA’s satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. The FDA may request additional studies (Phase IV) to evaluate long-term effects as a condition of approval. If the FDA’s evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter.

Phase IV clinical trials and post marketing studies.    In addition to studies requested by the FDA after approval, additional studies are conducted to explore new indications. The purpose of these trials and related publications is to broaden the application and use of the drug and its acceptance in the medical community.

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Approvals in European Union (“EU”).    In 1993, the EU established a system for the registration of medicinal products in the EU and under that system, marketing authorization may be submitted at either a centralized or decentralized level. The centralized procedure is administered by the European Agency for the Evaluation of Medicinal Products. This procedure is mandatory for the approval of biotechnology products and is available at the applicant’s option for other innovative products. The centralized procedure provides, for the first time in the EU, for the granting of a single marketing authorization that is valid in all EU member states. A mutual recognition procedure is available at the request of the applicant for all medicinal products that are not subject to the mandatory centralized procedure, under a decentralized procedure. The decentralized procedure creates a new system for mutual recognition of national approvals and establishes procedures for coordinated EU action on product suspensions and withdrawals. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more member states, certifying that identical dossiers are being submitted to all member states for which recognition is sought. Within 90 days of receiving the application and assessment report, each member state must decide whether or not to recognize the approval. The procedure encourages member states to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. If such disputes cannot be resolved within the 90-day period provided for review, the application will be subject to a binding arbitration procedure at the request of the applicant. Alternatively, the application may be withdrawn.

Approvals outside of the United States and EU.    Steps similar to those in the United States must be undertaken in virtually every other country comprising the market for our products before any such product can be commercialized in those countries. The approval procedure and the time required for approval vary from country to country and may involve additional testing. There can be no assurance that approvals will be granted on a timely basis or at all. In addition, regulatory approval of prices is required in most countries other than the United States. There can be no assurance that the resulting prices would be sufficient to generate an acceptable return to us.

Regulatory status of our pipeline.    We are conducting clinical trials for: CG53135, a potential protein therapeutic for the prevention of oral mucositis in cancer patients that are undergoing chemotherapy and radiotherapy; PXD101, a potential small molecule HDAC inhibitor for the treatment of advanced multiple myeloma; and CR002, a fully-human monoclonal antibody as a potential treatment to slow the progression of IgA nephropathy and delay kidney failure in patients affected by the disease. None of our product candidates have been approved for commercialization in the United States or elsewhere. We, or any of our collaborators, may not be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for some products. Failure by us, or our collaborators, to obtain required governmental approvals will delay or preclude our collaborators or us from marketing therapeutics or diagnostic products developed with us or limit the commercial use of such products and could have a material adverse effect on our business, financial condition and results of operations.

In February 2004, the FDA granted us orphan drug designation on CG53135, for the treatment of radiation induced oral mucositis. In November 2004, the FDA granted us orphan drug designation on CR002, as a potential treatment to slow the progression of IgA nephropathy and delay kidney failure in patients affected by the disease. The Orphan Drug Act of 1983 is intended to encourage companies to develop therapies for the treatment of diseases that affect fewer than 200,000 individuals in the United States at the time of application. Further criteria include the ability of the product to address an unmet medical need where no approved treatment option exists or to provide significant benefit over available treatments. Orphan drug designation, granted by the FDA’s Office of Orphan Products Development, provides us with a number of potential benefits for CG53135 and CR002. Orphan drug designation may result in seven years of market exclusivity in the United States upon FDA product approval, provided that the sponsor company continues to meet certain conditions established by the FDA. Upon marketing authorization and during the period of market exclusivity, the FDA does not accept or approve other applications to market the same drug for the same therapeutic indication. Other incentives provided by orphan designation include protocol assistance and eligibility for research and development support. Protocol assistance includes regulatory assistance and reduced filing fees, as well as advice on the conduct of clinical trials.

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In December 2004, the FDA granted us fast track status on CG53135, for the prevention of OM in patients receiving HSCT following myeloablative chemotherapy with or without TBI. Under the FDA Modernization Act of 1997, the Fast Track program facilitates interactions with the FDA before and during the submission of a NDA for therapeutics being investigated as a treatment of serious or life-threatening diseases where there is an unmet medical need. The Fast Track program enables a company to file an NDA on a rolling basis as data becomes available. This permits the FDA to review the filing as it is received, rather than waiting for the entire document prior to commencing the review process. With a Fast Track designation, there is an opportunity for more frequent interactions with the FDA and the possibility of a priority review, which could decrease the typical review period.

Our research and development activities involve the controlled use of hazardous materials, chemicals and controlled substances. We are subject to federal, state and local laws and regulations governing the acquisition, use, storage, handling and disposal of such materials and certain waste products.

Available Information

We were incorporated in Delaware in 1991. Our principal executive office is located at 555 Long Wharf Drive, 11th Floor, New Haven, Connecticut 06511. Our telephone number is (203) 401-3330. We maintain a web site on the Internet at http://www.curagen.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are available free of charge through the Investor Relations section of our website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). These documents are also available in the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330, and in addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

Employees

As of December 31, 2004, we and 454 had 242 full and part-time employees, 107 of whom hold Ph.D., M.D. or J.D. degrees. Our employees include engineers, physicians, molecular biologists, chemists, lawyers and computer scientists. We believe that we maintain good relationships with our employees. We believe that our future success will depend in large part on our ability to attract and retain experienced and skilled employees.

Seasonality

Our business is not subject to any material fluctuations based on the season of the year.

We maintain our administrative offices along with research facilities at locations in both Branford and New Haven, Connecticut. At December 31, 2004, we leased a total of approximately 155,000 square feet at all locations. Our leases are for original terms of two to six years, and generally provide for renewal options for terms of up to five years. In January 2004, we entered into a five-year lease agreement for an additional 20,000 square foot research facility in Branford to allow us to further our pipeline efforts. Also in 2004, we executed three vacancy agreements for approximately 13,000 square feet of space at our New Haven facility.

We believe that our facilities are adequate for our current operations or that suitable additional leased space will be available as needed. Our plans to construct a new corporate headquarters and protein production facility on the land we own in Branford have been deferred, pending improvements in the external financing environment which would afford us the ability to finance the future construction costs.

We are not currently a party to any material legal proceedings.

No matters were submitted to a vote of our security holders during the quarter ended December 31, 2004.

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PART II

Market Information

Our common stock is traded on the Nasdaq National Market under the symbol “CRGN”. The following table sets forth, for the periods indicated, the low and high sales prices per share for our common stock, as reported by the Nasdaq National Market:

Stockholders

As of March 1, 2005, there were approximately 221 shareholders of record of our common stock and, according to our estimates, 8,502 beneficial owners of our common stock.

Dividends

We have never paid cash dividends on our common stock and do not anticipate declaring any cash dividends in the foreseeable future. We currently intend to retain earnings, if any, to finance the development of our business.

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The selected consolidated financial data set forth below for each of the three years in the period ended December 31, 2004 are derived from our audited consolidated balance sheets as of December 31, 2004 and 2003 and the related audited consolidated statements of operations, of stockholders’ equity and of cash flows for each of the three years ended December 31, 2004, 2003 and 2002 and notes thereto, which are included elsewhere in this report. The consolidated balance sheet data as of December 31, 2002, 2001 and 2000 and the consolidated statements of operations data for each of the two years in the periods ended December 31, 2001 and 2000 have been derived from our related financial statements. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements.

Deficiency of Earnings Available to Cover Fixed Charges

The following table sets forth our consolidated deficiency of earnings available to cover fixed charges for each of our five most recent fiscal years.

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Overview

We are a genomics-based pharmaceutical development company dedicated to improving the lives of patients by developing novel protein, antibody and small molecule therapeutics in the areas of oncology, inflammatory diseases, and diabetes. Our pipeline of therapeutics is based on targets from the human genome that we believe play a role in important mechanisms underlying disease.

We have taken a systematic approach to identifying and validating the most promising therapeutic targets from the human genome that are both applicable and amenable to drug development. We use internal resources to develop our potential protein therapeutics and have established development alliances with Abgenix, Inc. (“Abgenix”) to support our antibody projects, Bayer AG (“Bayer”) to support small molecule projects for diabetes, TopoTarget A/S (“TopoTarget”) to support small molecule histone deacetylase (“HDAC”) inhibitor projects for oncology and inflammatory diseases, and Seattle Genetics, Inc. (“Seattle Genetics”) to support antibody-drug conjugate projects.

As our pipeline has matured over the past few years, we have decreased our early-stage target discovery efforts and focused our resources on the advancement of our pipeline of potential protein, antibody and small molecule therapeutics through clinical development. On October 19, 2004, we announced a corporate restructuring to focus on advancing our therapeutic pipeline through clinical development. As part of this restructuring, we reprioritized our development programs and reduced our employee base by approximately 110 people. Going forward, we plan to conserve resources and utilize our cash position to finance the development of products that have the highest potential for success.

In 2003, we initiated a Phase I trial on CG53135, which is being investigated as a potential protein therapeutic for the prevention of oral mucositis (“OM”) in cancer patients that are undergoing chemotherapy and radiotherapy. During 2004, we continued to make progress on the development of CG53135 for OM, including the initiation of an additional Phase I trial in cancer patients undergoing bone marrow transplantation. In October 2004, we announced the initiation of a Phase II trial on CG53135 enrolling patients in a randomized, placebo-controlled, multi-center study to determine the safety and efficacy of a single-dose of CG53135 to prevent the development of clinically significant OM. Approximately 200 patients will be randomized to receive a single administration of either placebo or one of three dosages of CG53135 immediately after bone marrow transplantation. In December 2004, data from our Phase I trial on CG53135 for cancer patients undergoing bone marrow transplantation was presented was presented at the 46^th Annual Meeting of the American Society of Hematology. Of the 22 patients presented in this poster, no serious drug-related adverse events were noted following treatment with CG53135, and a total of 18 of 22 patients (81.8%) did not develop severe grade 3 or 4 OM.

In February 2004, we received orphan drug designation from the Food and Drug Administration (“FDA”) for CG53135 in OM, which we believe will help to strengthen the program by offering important clinical development and commercialization benefits. In December 2004, we received Fast Track status from the FDA to investigate CG53135 for the prevention of OM in patients receiving hematopoietic stem cell transplantation following myeloablative chemotherapy with or without total body irradiation. The Fast Track program enables a company to file a New Drug Application (“NDA”) on a rolling basis as data becomes available and permits the FDA to review the filing as it is received, rather than waiting for the entire document prior to commencing the review process. With a Fast Track designation, there is an opportunity for more frequent interactions with the FDA and the possibility of a priority review, which could decrease the typical review period.

In June 2004, we added PXD101, a novel HDAC inhibitor, to our pipeline through a license and collaboration agreement with TopoTarget. PXD101 is one of the most advanced HDAC inhibitors in development and will be investigated as a potential treatment for both solid and hematologic cancers either alone, or in combination with other cancer drugs. The collaboration with TopoTarget also provides us with access to their extensive library of HDAC inhibitor candidates. HDAC inhibitors represent a new mechanistic class of anti-cancer

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therapeutics that target HDAC enzymes, and have been shown to: arrest growth of cancer cells; induce apoptosis, or programmed cell death; promote differentiation; inhibit angiogenesis; and sensitize cancer cells to overcome drug resistance. In August 2004, we signed a clinical trials agreement with the National Cancer Institute (“NCI”) that provides us with access to the expertise at the NCI for the design, implementation, and monitoring of clinical trials with PXD101. Under the agreement, the NCI will sponsor several clinical trials evaluating the activity of PXD101, either alone or in combination with other anti-cancer therapies, for the treatment of solid and hematologic malignancies. NCI-sponsored clinical trials will occur in parallel to those sponsored by CuraGen with all data generated available for use in future product registration. Data generated from two Phase I clinical trials evaluating PXD101 in patients with solid tumors and hematologic cancers enabled us to initiate in January 2005, a Phase II clinical trial on PXD101 for patients with advanced multiple myeloma.

In October 2004, we announced that CR002, our most advanced fully-human monoclonal antibody stemming from our collaboration with Abgenix, received clearance from the FDA to be investigated as a potential treatment for IgA nephropathy. CR002 is a novel fully-human monoclonal antibody with the potential to treat forms of kidney inflammation, such as IgA nephropathy, that, if left untreated, could progress to kidney failure. In November 2004, we received orphan drug designation from the FDA for CR002 as a potential treatment to slow the progression of IgA nephropathy and delay kidney failure in patients affected by the disease, which we believe will help to strengthen the program by offering important clinical development and commercialization benefits. A Phase I trial with CR002 began in November 2004 to determine the maximum tolerated dose in healthy male volunteers.

In October 2004, we announced the advancement of CR011, a fully-human monoclonal antibody-drug conjugate, which we are investigating as a potential treatment for metastatic melanoma. CR011 is the second fully-human monoclonal antibody stemming from our collaboration with Abgenix, and applies antibody-drug conjugate technology that we licensed from Seattle Genetics. We anticipate that CR011 will enter clinical trials during the first half of 2006.

In October 2004, we also announced the advancement of CT052, an investigational small molecule drug for the potential management of adult-onset (Type 2) diabetes, which will be co-developed with Bayer. This compound represents the first drug candidate to enter preclinical development from our ongoing collaboration with Bayer that was established to identify and develop promising drugs for the treatment of diabetes based upon targets we discovered. We anticipate that CT052 will enter clinical trials during the first half of 2006.

In addition to CG53135, PXD101, CR002, CR011, and CT052 we have several potential protein, antibody and small molecule therapeutics currently being evaluated in animal studies or being prepared for animal studies. These programs may lead to the filing of investigational new drug applications (“INDs”) in the future.

To enable us to focus on our pipeline, we announced the formation of 454 Life Sciences Corporation (“454”) in 2000. This majority-owned subsidiary is commercializing novel nanoscale instrumentation and technologies for rapidly and comprehensively determining the nucleotide sequence of entire genomes—“whole genome sequencing.” 454’s proprietary technology is expected to have widespread applications in industrial processes, agriculture, animal health, biodefense, and human health care, including drug discovery and development, and disease diagnosis. Scientists, using the 454 technology platform, will be able to generate whole genome sequences for a wide variety of viral, bacterial and small fungi organisms. In 2005, 454 will offer instrument systems and reagents to customers for high-throughput sequencing without the need and complexity of large-scale robotics. Additionally, 454 will continue scaling its technology to analyze larger model organisms, including human DNA, and develop other genomic applications.

We expect to generate value for our shareholders by developing therapeutics. We expect to become profitable by commercializing a subset of therapeutics stemming from our development pipeline, and establishing partnerships with pharmaceutical and biotechnology companies for the co-development and co-commercialization of other therapeutics from our development pipeline. Our failure to successfully develop

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pharmaceutical products that we can commercialize would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated from commercial sales of products developed through the application of our technologies and expertise are not expected for several years, if at all. We expect that our revenue or income sources for at least the next several years may be limited to: payments under various collaboration agreements to the extent milestones are met; 454 grant, service and product revenue; and interest income.

We expect to continue incurring substantial expenses relating to our research and development efforts, as we focus on: preclinical studies and clinical trials required for the development of therapeutic protein, antibody and small molecule product candidates; external programs identified by our platform as being promising and synergistic with our products and expertise; and 454, as it continues work on the development and commercialization of its technology for whole genome analysis. Conducting clinical trials is a lengthy, time-consuming and expensive process. We will incur substantial expenses for, and devote a significant amount of time to, these studies. As a result, we expect to incur continued losses over the next several years, unless we are able to realize additional revenues under existing or new collaboration agreements or through 454’s sales of genomic analysis services and/or complete genomic analysis systems. The timing and amounts of such revenues, if any, cannot be predicted with certainty and may fluctuate. Results of operations for any period may be unrelated to the results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results.

The 2003 and 2002 consolidated financial statements have been reclassified to conform to the classifications used in 2004. All dollar amounts in tabular presentations are shown in millions, unless otherwise noted.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and as such, actual results may differ from our estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements, we believe the following to be our critical accounting policies and uses of estimates:

Research and development expenses.    Research and development costs have been our most significant costs to date and primarily include personnel costs, supplies and reagents, clinical trial related costs such as contractual services and manufacturing costs, perpetual license fees, depreciation of lab equipment and allocated facility costs. Such costs are charged to research and development expenses as incurred. Our research and development expenses also include accruals for clinical trial related costs such as contractual services and current manufacturing costs. At each period end, we estimate the costs incurred to date but not yet invoiced, and we analyze the progress of these services based upon information received from the supplier when evaluating the adequacy of the accrued liabilities. Significant judgments and estimates must be used in determining the related accruals in any accounting period. Actual results could differ significantly from our estimates under different assumptions.

Revenue recognition.    We have entered into certain collaborative research agreements that provide for the partial or complete funding of specified projects in exchange for access to, and certain rights in, the data discovered under the related projects. We recognize revenue when (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable and (4) the collectibility is reasonably assured, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition”. Collaboration revenue is recognized based upon defined metrics of completion, as outlined in the respective agreements, which includes percentage of completion, milestones, and

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project specific deliverables. These metrics are reviewed internally each month to determine the work performed, deliverables met, and, if required, deliverables accepted by the collaborator. Deferred revenue arising from payments received under collaborative agreements is recognized as income when earned. We have also entered into a collaborative research exchange agreement in which services and technology access are exchanged between the collaborative partner and us. Collaboration revenues and expenses under this exchange agreement included the fair value of the work performed by each collaborative partner.

Results of Operations

The following table sets forth a comparison of the components of our net loss for the years ended December 31, 2004 and 2003:

The following table sets forth a comparison of revenue by segment, for the years ended December 31, 2004 and 2003:

Grant revenue.    The increase in grant revenue for the year ended December 31, 2004 was a result of two federal grants awarded to 454 in May 2004 and September 2004 from the National Human Genome Research Institute, one of the National Institutes of Health (“NIH”). These grants will partially fund the continued scale up of 454’s technology toward sequencing larger genomes. Each of these grants allowed 454 to recover all expenses that were directly related to the research outlined in the grant award for 90 days prior to the grant award date. We expect 2005 grant revenue to increase in comparison to 2004, as the research outlined in these two grants will be conducted for the entire fiscal year.

Collaboration revenue.    The decrease in CuraGen’s collaboration revenue for the year ended December 31, 2004 was primarily related to a decline in revenue recognized from various strategic alliances and

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in the volume of projects related to the Bayer alliance during the fourth quarter of 2004. We expect that 2005 collaboration revenue will remain fairly constant as compared to 2004, reflecting continued progress on the Bayer alliance.

The increase in 454’s collaboration revenue for the year ended December 31, 2004 was related to the sales of genomic analysis services as 454 began to commercialize its sequencing platform. We expect 454’s 2005 collaboration revenue to continue to increase as 454 continues to commercialize its platform. Additionally, we expect revenue from 454 in 2005 from the sale of instrument systems and reagents.

Grant research expenses.    The increase in grant research expenses for the year ended December 31, 2004 was a result of two federal grants awarded to 454 in May 2004 and September 2004 from the NIH, which will partially fund the scale up of 454’s technology toward sequencing larger genomes. Grant research expenses for the first grant were recorded beginning in mid-May 2004 and for the second grant beginning at the end of September 2004. The expenses included personnel costs and lab supplies that were directly related to the research outlined in the grant award. We expect 2005 grant expenses to increase in comparison to 2004, as the research outlined in these two grants will be conducted for the entire fiscal year.

Research and development expenses.    The following table sets forth a comparison of research and development expenses by segment, for the years ended December 31, 2004 and 2003:

Research and development expenses consist primarily of: salary and benefits; supplies and reagents; contractual and manufacturing costs; perpetual license fees; depreciation and amortization; and allocated facility costs. Our research and development efforts are concentrated on four major project areas: collaborations; preclinical drug candidates; clinical trials; and our majority-owned subsidiary, 454. With the exception of 454, we budget and monitor our research and development costs by expense category, rather than by project, because these costs often benefit multiple projects and/or our technology platform.

Below is a summary that reconciles our total research and development expenses for the years ended December 31, 2004 and 2003 by the major categories mentioned above:

The increase in research and development expenses for CuraGen for the year ended December 31, 2004 was primarily due to: an increase in contractual and manufacturing costs related to our preclinical studies and clinical trials, and perpetual license fee payments during the second quarter of 2004 of approximately $7.0 million (primarily related to the TopoTarget and Seattle Genetics collaborations); offset by a reduction in the first quarter

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of 2004 of prior year accruals related to payments subsequently determined to be no longer owed due to amended contract terms for the Abgenix collaboration. In addition, decreases in salary and benefits, and supplies and reagents, in connection with the October 2004 restructuring plan offset the overall increases in research and development expenses. We anticipate an increase in research and development expenses during 2005 of 7% to 10% as compared to 2004, primarily due to contractual services related to clinical trials and manufacturing; perpetual licensing fees; and milestone payments, primarily to TopoTarget.

The increase in research and development expenses for 454 for the year ended December 31, 2004 was primarily due to increased personnel costs, lab supplies and reagents, and depreciation expense associated with developing a measurement service center and manufacturing capabilities in connection with the preparation for commercialization of 454’s technology.

As soon as we start to conduct a Phase I clinical trial for a potential therapeutic, we begin to track the direct research and development expenses associated with that clinical candidate. The following table shows cumulative direct research and development expenses associated with each clinical candidate as of December 31, 2004 and 2003:

Currently, our potential pharmaceutical products require significant research and development efforts and preclinical testing, and will require extensive clinical trials prior to submitting an application to regulatory agencies for their commercial use. Although we are conducting human studies with respect to CG53135, PXD101, and CR002, we may not be successful in developing or commercializing these or other products. Our product candidates are subject to the risks of failure inherent in the development and commercialization of pharmaceutical products and we cannot currently reliably estimate when, if ever, our product candidates will generate revenue and cash flows.

Completion of research and development, preclinical testing and clinical trials may take many years. Estimates of completion periods for any of our major research and development projects are highly speculative and variable, depending on the nature of the disease indication, how common it is among the general populace, and the results of the research. For example, preclinical testing and clinical trials can often go on for an indeterminate period of time since the results of tests are continually monitored, with each test considered “complete” only when sufficient data has been accumulated to assess whether the next phases are warranted or whether the effort should be abandoned. Typically, Phase I clinical trials are expected to last between 12 and 24 months, Phase II clinical trials are expected to last between 24 and 36 months and Phase III clinical trials are expected to last between 24 and 60 months. The most significant time and costs associated with clinical development are the Phase III trials as they tend to be the longest and most comprehensive studies conducted during the drug development process.

In addition, many factors may delay the commencement and speed of completion of preclinical testing and clinical trials, including the number of patients participating in the trial, the duration of patient follow-up

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required, the number of clinical sites at which the trials are conducted, and the length of time required to locate and enroll suitable patient subjects. The successful completion of our development programs and the successful development of our product candidates are highly uncertain and are subject to numerous challenges and risks. Therefore, we cannot presently estimate anticipated completion dates for any of our projects, as described more fully in the Risk Factors section under the heading “Risks Related to Our Business.”

Due to the variability in the length of time necessary to develop a product candidate, the uncertainties related to the cost of projects and our ability to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate costs to bring our product candidates to market are not available. If our major research and development projects are delayed, then we can expect to incur additional costs in conducting our preclinical testing and clinical trials and a longer period of time before we become profitable from our operating activities, as described more fully in the Risk Factors section under the headings “We have a history of operating losses and expect to incur losses in the future” and “We may need to raise additional funding, which may not be available on favorable terms, if at all.” Accordingly, the timing of the potential market approvals for our existing product candidates, CG53135, PXD101, CR002, and future product development candidates, may have a significant impact on our capital requirements.

Asset impairment expense.    During the third quarter of 2004, we had an independent market value appraisal performed on the land we own in Branford, Connecticut. This property is being held for the possible future construction of a corporate headquarters and protein production facility, although plans have been deferred, pending improvements in the external financing environment which would afford us the ability to finance the future construction costs. At September 30, 2004, the appraised market value of the property was below the holding value. Therefore, an asset impairment expense of $1.9 million was recorded in the third quarter of 2004 in order to properly reflect the estimate of the fair value of the property in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

General and administrative expenses.    General and administrative expenses for the year ended December 31, 2004 remained constant as compared to 2003. General and administrative expenses are expected to decrease by approximately 5% during 2005 as compared to 2004, as a result of the recent corporate restructuring and lower legal patent costs.

Restructuring and related charges.    Restructuring and related charges of approximately $4.0 million were incurred in the fourth quarter of 2004 as a part of our October 2004 corporate restructuring plan. In connection with the 2004 restructuring plan, we incurred $3.0 million related to employee separation costs and $1.0 million of asset impairment costs. The employee separation costs were recorded under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) and included amounts to be paid for severance and related benefits, the services for which had been performed in full as of the end of 2004. The cash requirements under the October 2004 restructuring plan were $2.7 million, of which $2.2 million was paid prior to December 31, 2004. The remaining cash requirements of $0.5 million will be paid through June 2005.

Interest income.    Interest income for the year ended December 31, 2004 decreased primarily due to the utilization of cash and investment balances in the normal course of operations and the repurchase of $20.0 million of our 6% convertible subordinated debentures due in 2007, as well as lower yields in our investment portfolio, offset by the receipt of net proceeds of approximately $106.2 million from our 4% convertible subordinated notes due in 2011. We earned an average yield of 2.2% in 2004 as compared to 2.3% in 2003. In 2005, we expect the yields in our investment portfolio to be slightly higher than 2004. However, due to the utilization of cash and investments balances in the normal course of operations, we anticipate interest income to decrease by approximately $1.0 to $2.0 million in 2005. In the event that during 2005 we use cash to repay a portion of our remaining existing debt due in 2007, our estimate of the size of anticipated decrease in interest income for 2005 will differ accordingly.

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Interest expense.    We expect interest expense to be approximately $12.5 million during 2005, primarily attributable to the interest paid semi-annually to the holders of our $130.0 million 6% convertible subordinated debentures due in 2007, and our $110.0 million 4% convertible subordinated notes due in 2011. In the event that during 2005 we use cash to repay a portion of our remaining existing debt due in 2007, our estimate of 2005 interest expense will differ accordingly.

Loss on extinguishment of debt.    In February 2004, we repurchased $20.0 million of our 6% convertible subordinated debentures due in 2007, for total consideration of $20.0 million, plus accrued interest of $0.05 million to the date of repurchase. As a result of the transaction we recorded a loss of approximately $0.3 million in “Loss on extinguishment of debt”, due to the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt.

Income tax benefit.    We recorded an income tax benefit during 2004 as a result of Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for forgoing carryforward of the research and development credit. For the year ended December 31, 2004, the increase in the income tax benefit was a result of the expiration of the State of Connecticut statute, as it relates to the Year 2000 income tax benefit. We expect the 2005 income tax benefit to be consistent with 2004 (before the adjustment to reflect the statute expiration), as 2005 qualified expenses are expected to remain relatively constant as compared to 2004.

Minority interest in subsidiary loss.    Minority interest in subsidiary loss for the year ended December 31, 2004 (which is the portion of 454’s loss attributable to shareholders of 454 other than us) remained relatively consistent with the same period in 2003. During 2005, losses attributed to the minority ownership in 454 are expected to decrease to $4.0 to $5.0 million, as 454 begins selling instruments and reagents as well as increasing their sequencing services. In the event that during 2005 the cumulative losses applicable to the minority interest in subsidiary exceed the minority interest in the equity capital of 454, all further losses applicable to the minority interest will be charged to CuraGen.

The following table sets forth a comparison of the components of our net loss for the years ended December 31, 2003 and 2002 (in millions):

Collaboration revenue.    The decrease in collaboration revenue for the year ended December 31, 2003 was primarily a result of a decline in revenue recognized from the Abgenix strategic alliance. Also reflected in the decrease was the on-going change in our business strategy, to establish strategic research and development alliances with companies for the co-development and co-commercialization of therapeutics from our development pipeline, rather than focusing on short-term revenue generating service-based collaborations. In addition, during 2002 the setup phase of the Bayer alliance was completed and we received a related milestone payment, resulting in a transition to the production phase of that alliance.

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Research and development expenses.    The following table sets forth a comparison of research and development expenses by segment, for the years ended December 31, 2003 and 2002:

Research and development expenses consist primarily of: salary and benefits; supplies and reagents; contractual and manufacturing costs; depreciation and amortization; and allocated facility costs. Our research and development efforts are concentrated on four major project areas: collaborations; preclinical drug candidates; clinical trials; and our majority-owned subsidiary, 454. With the exception of 454, we budget and monitor our research and development costs by expense category, rather than by project, because these costs often benefit multiple projects and/or our technology platform.

Below is a summary that reconciles our total research and development expenses for the years ended December 31, 2003 and 2002 by the major categories mentioned above:

The decrease in research and development expenses for the year ended December 31, 2003 was primarily due to implementation of corporate restructuring plans in late 2002 and mid 2003, intended to reduce overall costs and focus resources on prioritizing, selecting and advancing our most promising product candidates.

As soon as we start to conduct a Phase I clinical trial for a potential therapeutic, we begin to track the direct research and development costs associated with that clinical candidate. As of December 31, 2003, we had incurred approximately $6.2 million of direct research and development expenses related to our initial clinical candidate, CG53135, for which we received FDA clearance to commence a Phase I clinical trial for oral mucositis in March 2003.

General and administrative expenses.    General and administrative expenses for the year ended December 31, 2003 decreased primarily due to the implementation of corporate restructuring plans. Additionally, lower intellectual property expenses are indicative of the shift in our focus from early-stage discovery efforts to the advancement of our therapeutic development efforts.

Restructuring and related charges.    Restructuring and related charges of approximately $2.9 million were incurred in the second quarter of 2003 as a part of our June 2003 corporate restructuring plan which was intended to focus resources on continuing to advance our pipeline of therapeutics into preclinical and clinical development. In connection with the 2003 restructuring plan, we incurred $1.8 million related to employee separation costs, $1.0 million of operating lease obligations and $0.1 million of asset impairment costs. The employee separation costs were recorded under SFAS 146 and included amounts to be paid for severance and related benefits, the services for which had been performed in full as of the end of the second quarter of 2003. The cash requirements under the June 2003 restructuring plan were $2.7 million, of which $1.4 million were paid prior to December 31, 2003. The remaining cash requirements at December 31, 2004 and 2003 of $0.5 million and $1.3 million, respectively, will be paid through the end of 2006.

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Interest income.    Interest income for the year ended December 31, 2003 decreased primarily due to lower yields in our investment portfolio and a decrease in cash and investment balances during 2003. We earned an average yield of 2.3% in 2003 as compared to 2.7% in 2002.

Income tax benefit.    We recorded the income tax benefit as a result of Connecticut legislation, which allowed companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for forgoing the credit carryforward. For the year ended December 31, 2003, the income tax benefit decrease was a result of the decline in various expenses which qualified for the annual research and development credit as a result of the corporate restructuring plan, primarily personnel costs, supplies and reagents, and intellectual property expenses. In addition, due to 454’s focus on revenues to be realized in the short term, 454 elected not to request a cash refund for 2003, but instead elected to continue to carry forward the credit.

Minority interest in subsidiary loss.    Minority interest in subsidiary loss for the year ended December 31, 2003 (which is the portion of 454’s loss attributable to shareholders of 454 other than us) increased primarily due to 454’s additional efforts to advance its technology.

Liquidity and Capital Resources

Since our inception, we have financed our operations and met our capital expenditure requirements primarily through convertible subordinated debt offerings, public equity offerings, private placements of equity securities, revenues received under our collaborative research agreements and government grants, and exercises of stock options. In February 2004, we completed an offering of $100.0 million of 4% convertible subordinated notes due February 15, 2011, and received net proceeds of approximately $96.5 million. In addition, in March 2004, the initial purchasers exercised their option to purchase an additional $10.0 million of 4% convertible subordinated notes due February 15, 2011, providing us with additional net proceeds of approximately $9.7 million. Also in February 2004, we repurchased $20.0 million of our 6% convertible subordinated debentures due in 2007, for total consideration of $20.0 million, plus accrued interest of $0.05 million to the date of repurchase. As of December 31, 2004, we had recognized $112.4 million of cumulative sponsored research revenues from collaborative research agreements and government grants. At December 31, 2004, our gross investment in lab and office equipment, computers, land and leasehold improvements was $49.3 million. Since inception, we have not had any off-balance sheet arrangements. To date, inflation has not had a material effect on our business.

454 received two federal grants during 2004, for specific purposes that are subject to review and audit by the grantor agencies. Such audits could lead to requests for reimbursement by the grantor agency for any expenditures disallowed under the terms of the grant. Additionally, any noncompliance with the terms of the grant could lead to loss of current or future awards.

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Cash and investments.    The following table depicts the components of our operating, investing and financing activities for the year ended December 31, 2004, using the direct cash flow method:

In accordance with our investment policy, we are utilizing the following investment objectives for cash and investments: (1) investment decisions are made with the expectation of minimum risk of principal loss, even with a modest penalty in yield; (2) appropriate cash balances and related short-term funds are maintained for immediate liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum yield is achieved.

Future Liquidity.    During the next twelve months, we expect to continue to fund our operations through a combination of the following sources: cash and investment balances; collaboration revenue; interest income; grant revenue; instrument system and reagent sales; potential public securities offerings; and/or private strategic-driven common stock offerings. We also plan to continue making substantial investments to advance our preclinical and clinical drug pipeline, as well as commercializing 454’s genomic analysis technology. In that regard, we foresee the following as significant uses of liquidity: personnel costs; supplies and reagents; contractual services related to clinical trials and manufacturing; perpetual licensing fees; potential milestone payments; legal expenses in support of the continued protection of our intellectual property portfolio; costs related to 454, as they continue to commercialize and develop new technologies for whole genome analysis; external programs identified by our platform as being promising and synergistic with our products and expertise; cost-sharing of expenses with Bayer related to CT052 preclinical development, in which both parties will jointly fund the relevant preclinical research, development and commercialization activities; and capital expenditures during the first quarter of 2005, primarily for the expansion of our existing protein production laboratory facilities. In addition, we expect the payments of interest to the holders of our convertible subordinated debt due in 2007 and in 2011 to be a continued significant use of liquidity.

Depending on market and other conditions, from time to time, we may repurchase a portion of the existing 6% convertible subordinated debentures due 2007 in open market purchases, in privately negotiated transactions, or otherwise. In addition, we also may use sources of liquidity for working capital, general corporate purposes

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and potentially for future acquisitions of complementary businesses or technologies. The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount and extent of our acquisitions, our product development activities, our investments in technology and the amount of cash generated by our operations. Actual expenditures may vary substantially from our estimates. Our failure to use sources of liquidity effectively could have a material adverse effect on our business, results of operations and financial condition.

We believe that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements for the next twenty-four months. Our operating and capital expenditures are considered to be crucial to our future success, and by continuing to make strategic investments in our preclinical and clinical drug pipeline, we believe that we are building substantial value for our shareholders. The adequacy of our available funds to meet our future operating and capital requirements, including the repayment of our remaining $130.0 million of 6% convertible subordinated debentures due February 2, 2007 and our $110.0 million of 4% convertible subordinated notes due February 15, 2011, will depend on many factors. These factors include: the number, breadth and progress of our research, product development and clinical programs; the costs and timing of obtaining regulatory approvals for any of our products; potential future acquisitions of complementary businesses or technologies; in-licensing of pharmaceutical products; and costs incurred in enforcing and defending our patent claims and other intellectual property rights.

While we will continue to explore alternative sources for financing our business activities, including the possibility of public securities offerings and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products, and may be unable to continue operations. This result could cause our shareholders to lose all or a substantial portion of their investment.

Contractual Obligations

In the table below, we set forth our enforceable and legally binding obligations, along with our future commitments related to all contracts that we are likely to continue, regardless of the fact that they are cancelable as of December 31, 2004. Some of the figures we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, anticipated actions by third parties, progress of our clinical programs and other factors.

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The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Purchase obligations for supplies and reagents are not included in the table above, as our purchase orders typically represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on us and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current operating needs and are fulfilled by our vendors within short time periods. We do not have significant agreements for the purchase of supplies and reagents specifying minimum quantities or set prices.

In addition, we have committed to make potential future milestone payments to third-parties as part of in-licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory and/or commercial milestones. Because the achievement of these milestones is neither probable nor reasonably estimable, such contingencies have not been recorded on our consolidated balance sheet and are not included above.

Income Taxes

For income tax purposes, we do not file consolidated income tax returns with 454. As of December 31, 2004, we and 454 have tax net operating loss carryforwards available to reduce future federal and Connecticut taxable income and research and development tax credit carryforwards available to offset future federal and Connecticut income taxes as detailed below. Utilization of the net operating loss and tax credit carryforwards may be limited due to changes within each company’s ownership, as defined within Section 382 of the Internal Revenue Code.

Recently Enacted Pronouncements

The Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities—an Interpretation of Accounting Research Bulletin No. 51,” (“FIN 46”) which clarifies rules for consolidation of special purpose entities. The adoption of FIN 46 did not have a material effect on our financial statements. In December 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”) which clarifies rules for consolidation of special purpose entities. We have evaluated the provisions of FIN 46R, and have determined that it does not have an impact on our financial statements.

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In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) which is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation”. Statement 123, as originally issued, is effective until the provisions of SFAS 123R are fully adopted. SFAS 123R is effective for public entities that do not file as a small business issuer, as of the beginning of the first interim or annual reporting period that begins after June 15, 2005, and therefore, we will be required to adopt SFAS 123R on July 1, 2005. The proforma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and retroactive adoption options. We anticipate utilizing the modified prospective method which requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options beginning with the first period restated. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, nor have we determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

In December 2004, the FASB issued Statement of Financial Accounting No. 153, “Exchanges of Nonmonetary Assets-an amendment of APB Opinion No. 29”. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after December 16, 2004. The provisions of this Statement should be applied prospectively. We have evaluated the provisions of this pronouncement, and we do not believe it will have an impact on our financial statements.

In March 2004, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 03-1 “Other-Than-Temporary Impairments and Its Application of Certain Investments.” This statement provides guidance for assessing impairment losses on debt and equity investments. EITF Issue No. 03-1 also requires additional disclosures in the footnotes to the financial statements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF Issue No. 03-1; however, the disclosure requirements remain effective and have been adopted. We will evaluate the effect, if any, of EITF 03-1 when final guidance is released.

Certain Factors That May Affect Results of Operations

This report contains certain forward-looking statements that are subject to certain risks and uncertainties. Generally, these statements can be identified by the use of terms such as “estimate,” “project,” “plan,” “intend,” “expect,” “believe,” “anticipate,” “should,” “may,” “will,” and similar expressions. Forward-looking statements may include statements about: (i) our expectation that a Phase I clinical trial to evaluate the safety and tolerability on CG53135 for the treatment, as opposed to the prevention, of OM will be initiated in the first half of 2005; (ii) our expectation that CR011 and CT052will enter clinical trials during the first half of 2006; (iii) our expectation that the Phase II clinical trial for PXD101, which is an open label, multi-center study that is expected to enroll approximately 50 patients in multiple sites in Europe and the United States, will be completed by mid-2006; (iv) our expectation that many of the INDs that we anticipate filing in the future will be from our pipeline, and have been or are ready to be evaluated in animal studies; (v) our expectation that, through our Bayer collaboration, we will reduce drug development costs, reduce the time to market, and create safer and more

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efficacious therapeutics; (vi) the expectation that 454’s proprietary technology will have widespread applications in industrial processes, agriculture, animal health, biodefense, human health care, including drug discovery and development, and disease diagnosis; (vii) the ability of 454 to generate whole genome sequences for a wide variety of viral, bacterial and small fungi organisms; (viii) the ability of 454 to reach its goal of allowing entire genomes to be analyzed without the cost and time restrictions normally associated with scaling up current methods of DNA sequencing in large facilities; (ix) the ability of 454 to sell instrument systems and reagents to customers for high-throughput sequencing without the need and complexity of large-scale robotics; (x) the ability of 454 to continue scaling its technology to analyze larger model organisms, including human DNA, and develop other genomic applications; (xi) the ability of 454’s technology platform, when combined with the use of advanced nanotechnology, to reduce cost and throughput roadblocks to efficient whole genome analysis; (xii) our expectation that 454 will contribute revenue and value to the consolidated entity; (xiii) our expectation to become profitable by commercializing a subset of therapeutics stemming from our development pipeline, and establishing partnerships with pharmaceutical and biotechnology companies for the co-development and co-commercialization of therapeutics from our development pipeline; (xiv) our expectation that NCI-sponsored clinical trials will occur in parallel to those we sponsor, with all data generated available for use in future product registration; (xv) our expectation to continue incurring substantial expenses relating to our research and development efforts; (xvi) our expectation to incur continued losses over the next several years; (xvii) our expectation that grant revenue will increase in comparison to 2004; (xviii) our expectation that 2005 collaboration revenue will remain fairly constant as compared to 2004; (xix) our expectation that 454’s 2005 collaboration revenue will increase; (xx) our expectation that we will have revenue for 454 in 2005 from the sale of instrument systems and reagents; (xxi) our expectation that grant research expenses will increase in comparison to 2004; (xxii) our anticipation that research and development expenses during 2005 will increase 7% to 10% as compared to 2004; (xxiii) our expectation that general and administrative expenses are expected to decrease by approximately 5% during 2005 as compared to 2004; (xxiv) our plans to pay the remaining cash requirements of $0.5 million through the end of 2006, as part of our June 2003 restructuring plan; (xxv) our plans to pay the remaining cash requirements of $0.5 through June 2005, as part of our October 2004 restructuring plan; (xxvi) our expectation that during 2005, the yields in our investment portfolio will be slightly higher than 2004; (xxvii) our anticipation that interest income will decrease by approximately $1.0 to $2.0 million in 2005; (xxviii) our expectation that interest expense will be approximately $12.5 million during 2005; (xxix) our expectation that the 2005 income tax benefit will be consistent with 2004 (before the adjustment to reflect the statute expiration); (xxx) our expectation that during 2005 the losses attributed to the minority ownership in 454 will decrease to $4.0 to $5.0 million; (xxxi) our expectation that we will cost-share expenses with Bayer related to CT052 preclinical development, in which both parties will jointly fund the relevant preclinical research, development and commercialization activities; (xxxii) our expectation that the payments of interest to the holders of our convertible subordinated debt due in 2007 and 2011 will be a significant use of liquidity; (xxxiii) our expectation that we will incur significant capital expenditures during the first quarter of 2005, primarily for the expansion of our existing protein production laboratory facilities; and, (xxxiv) our belief that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements for the next twenty-four months.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements, therefore, should be considered in light of all of the information included or referred to in this report, including the cautionary information set forth under the heading Risk Factors below. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.

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RISK FACTORS

Risks Related to Our Business

Because our business strategy is still largely untested, we do not know whether we will be able to commercialize any of our products or to what extent we will generate revenue or become profitable.

We do not know whether we can implement our business strategy successfully because we are in the early stages of development. Initially, we set out to find as many genes and their related functions as possible and are now using that information to develop our own therapeutic products. This strategy is largely untested. Other companies first target particular diseases and try to find cures for them, have a limited number of genes and proteins of potential therapeutic interest, or rely on other more proven strategies. If our strategy does not result in the development of products that we can commercialize, we will be unable to generate revenue. We have not completed development of any product based on our genomics research. Although we have three products being investigated in clinical trials, we cannot be certain that these or any future products will receive marketing approval. If we are unable to commercialize products, we may not be able to recover our investment in our product development efforts.

Because clinical trials for our products will be expensive and protracted and their outcome is uncertain, we must invest substantial amounts of time and money that may not yield viable products.

Conducting clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any product, we must demonstrate through laboratory, animal and human studies that such product is both effective and safe for use in humans. We will incur substantial expense for, and devote a significant amount of time to, these studies.

Completion of clinical trials may take many years. The length of time required varies substantially according to the type, complexity, novelty and intended use of the product candidate. The FDA monitors the progress of each phase of testing, and may require the modification, suspension, or termination of a trial if it is determined to present excessive risks to patients. Our rate of commencement and completion of clinical trials may be delayed by many factors, including:

Studies that we conduct, or studies which third parties conduct on our behalf, may not demonstrate sufficient effectiveness and safety to obtain the requisite regulatory approvals for these or any other potential products. Regulatory authorities may not permit us to undertake any additional clinical trials. The clinical trial process may be accompanied by substantial delay and expense and there can be no assurance that the data generated in these studies ultimately will be sufficient for marketing approval by the FDA.

We have three products in clinical development and our other products are in preclinical development. None of these products may demonstrate sufficient effectiveness or safety to obtain the requisite regulatory approvals required for initiation or continuation of clinical studies or obtaining marketing approval.

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Because we have limited experience in developing, commercializing and marketing products, we may be unsuccessful in our efforts to do so.

Currently, we are developing several potential pharmaceutical products, and such products will require significant research and development and preclinical testing, and will require extensive clinical testing prior to our submitting any regulatory application for their commercial use. Although we are conducting human studies with respect to three products, we have limited experience with these activities and may not be successful in developing or commercializing these or other products. These activities, if undertaken without the collaboration of others, will require the expenditure of significant funds. Such potential pharmaceutical products will be subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies. Before we can commercialize a product, we must rigorously test the product in the laboratory and complete extensive human studies. Even if we complete such studies, our ability to develop and commercialize products will depend on our ability to:

As a result of these possibilities, we may not be able to develop through our research and development activities any commercially viable products. We cannot be certain that expenses for testing and study will yield profitable products or even products approved for marketing by the FDA. If we are not successful in identifying products that we can develop commercially, we may be unable to recover the large investment we have made in research, development and manufacturing. In addition, should we choose to develop pharmaceutical products internally, we will have to make significant investments in pharmaceutical product development, marketing, sales and regulatory compliance resources, and we will have to establish or contract for the manufacture of products under the current good manufacturing practices (“cGMPs”) of the FDA. Any potential products developed by our licensees will be subject to the same risks.

We do not have any marketed products. If we develop products that can be marketed, we intend to market the products either independently or together with collaborators or strategic partners. If we decide to market any products independently, we will incur significant additional expenditures and commit significant additional management resources to establish a sales force. For any products that we market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We may also contract with third parties to market certain of our products. Ultimately, we and our partners may not be successful in marketing our products.

We depend on a limited number of suppliers to manufacture and supply critical components of our development and clinical programs.

Currently, we contract with third-party manufacturers or develop products with partners and use the partners’ manufacturing capabilities. As we use others to manufacture our products, we depend on those parties to comply with cGMPs, and other regulatory requirements and to deliver materials on a timely basis. These parties may not perform adequately. Any failures by these third parties may delay our development of products or the submission of these products for regulatory approval.

We depend on third-party research organizations to design and conduct our laboratory testing and human studies. If we are unable to obtain any necessary services on acceptable terms, we may not complete our product development efforts in a timely manner. As we rely on third parties for laboratory testing and human studies, we may lose some control over these activities and become too dependent upon these parties. These third parties may not complete testing activities or human studies on schedule or when we request.

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Because neither we nor any of our collaborative partners have received marketing approval for any product resulting from our research and development efforts, and may never be able to obtain any such approval, we may not be able to generate any product revenue.

All the products being developed by our collaborative partners will require additional research and development, extensive preclinical studies and clinical trials and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaborative partners to achieve various regulatory approval milestones may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaborative partners may need to address a number of technical challenges successfully in order to complete development of our products. Moreover, these products may not be effective in treating any disease or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

We may be unable to manufacture or obtain sufficient quantities of our products and ensure their proper performance and quality.

Biopharmaceuticals must be produced under the cGMPs of the FDA. We do not have facilities capable of manufacturing drug products under cGMPs and must outsource any such production. We are devoting resources to establishing our own manufacturing capabilities to support development and preclinical activities and are contracting with third-party vendors for the manufacture of materials for use in humans. We may be unable to contract successfully for cGMPs manufacture of any products and may be unable to obtain required quantities of our products economically. We may not be able to obtain capacity to produce a sufficient amount of commercial product to meet our clinical development and commercial needs. Failure to meet the demand for product may adversely affect our ability to continue to market the product.

Compliance with government regulation is critical to our business and failure to satisfy regulatory requirements could impair our business.

Prior to the marketing of any new drug developed by us, or by our collaborators, that new drug must undergo an extensive regulatory review process in the United States and other countries. This regulatory process, which includes preclinical and clinical studies, as well as post-marketing surveillance to establish a compound’s safety and efficacy, can take many years and require the expenditure of substantial resources. Data obtained from such studies are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. Even if the FDA allows clinical testing of our products, we will still need to obtain institutional review board approval for each site participating in a clinical study, which may involve additional delays. The rate of completion of clinical trials depends upon, among other factors, the enrollment of patients. Patient enrollment is a function of many factors, including:

We have not had any of our product candidates receive approval for commercialization in the United States or elsewhere. Neither we nor our collaborators may be able to conduct clinical testing or obtain the necessary approvals from the FDA or other regulatory authorities for any products. Failure by us or our collaborators to obtain required governmental approvals will delay or preclude our collaborators or us from marketing drugs developed

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with us or limit the commercial use of such products and could have a material adverse effect on our business, financial condition and results of operations. Even where a product is exempted from FDA clearance or approval, the FDA may impose restrictions as to the types of customers to which we can market and sell our products. Such restrictions may materially and adversely affect our business, financial condition and results of operations.

In addition, the FDA may condition marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy. Rigorous and extensive FDA regulation of pharmaceutical products continues after approval, particularly with respect to compliance with cGMPs reporting of adverse effects, advertising, promotion and marketing. Discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions, any of which could materially adversely affect our business.

We must obtain regulatory approval by governmental agencies in other countries prior to commercialization of our products in those countries. Foreign regulatory systems may be just as rigorous, costly and uncertain as in the United States.

We rely significantly on our collaborative partners, and our business could be harmed if we are unable to maintain strategic alliances.

As part of our business strategy, we have strategic research and development alliances with companies to gain access to specific technologies. These alliances with other pharmaceutical and biotechnology companies may provide us with access to unique technologies, access to capital, near-term revenues, milestone and/or royalty payments, and potential profit sharing arrangements. In return, we provide access to unique technologies, expertise in genomics, and information on the molecular basis of disease, drug targets, and drug candidates. To date, we have entered into significant strategic alliances with Abgenix, Bayer, TopoTarget and Seattle Genetics, in addition to numerous smaller agreements to facilitate these efforts. In these strategic alliances, either party can terminate the agreement at any time the alliance permits them to or if either party materially breaches the contract. We may not be able to maintain or expand existing alliances or establish any additional alliances. If any of our existing collaborators were to breach or terminate their agreements with us or otherwise fail to conduct activities successfully and in a timely manner, the preclinical or clinical development or commercialization of product candidates or research programs may be delayed or terminated.

We depend on attracting and retaining key employees.

We are highly dependent on the principal members of our management and scientific staff, including Jonathan M. Rothberg, Ph.D., our Chief Executive Officer, President and Chairman of the Board; David M. Wurzer, Executive Vice President and Chief Financial Officer; Christopher K. McLeod, Executive Vice President and interim Chief Executive Officer and President at 454; and Timothy M. Shannon, M.D., Executive Vice President and Chief Medical Officer. The loss of services of any of these personnel could materially adversely affect our business, financial condition and results of operations. We entered into employment agreements with all of the principal members of our management team. We maintain key person life insurance on the life of Dr. Rothberg in the amount of $2.0 million. Our future success also will depend in part on the continued services of our key scientific and management personnel and our ability to attract, hire and retain additional personnel. There is intense competition for such qualified personnel and there can be no assurance that we will be able to continue to attract and retain such personnel. Failure to attract and retain key personnel could materially, adversely affect our business, financial condition and results of operations.

We depend on academic collaborators, consultants and scientific advisors.

We have relationships with collaborators and consultants at academic and other institutions who conduct research at our request. These collaborators and consultants are not our employees. Substantially all of our collaborators and consultants are employed by employers other than us and may have commitments to, or

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consulting or advisory contracts with, other entities that may limit their availability to us. As a result, we have limited control over their activities and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities. Our ability to discover genes and biological pathways involved in human disease, explore and validate biological activity of therapeutic candidates and commercialize products based on those discoveries may depend in part on continued collaborations with researchers at academic and other institutions. We may not be able to negotiate additional acceptable collaborations with collaborators or consultants at academic and other institutions.

Our academic collaborators, consultants and scientific advisors may have relationships with other commercial entities, some of which could compete with us. Our academic collaborators, consultants and scientific advisors sign agreements which provide for confidentiality of our proprietary information and of the results of studies. We may not be able to maintain the confidentiality of our technology and other confidential information in connection with every academic collaboration or advisory arrangement, and any unauthorized dissemination of our confidential information could materially adversely affect our business, financial condition and results of operations. Further, any such collaborator, consultant or advisor may enter into an employment agreement or consulting arrangement with one of our competitors.

Competition in our field is intense and likely to increase.

We are subject to significant competition from organizations that are pursuing strategies, approaches, technologies and products that are similar to our own. Many of the organizations competing with us have greater capital resources, research and development staffs and facilities and marketing capabilities. In addition, research in the field of drug development is highly competitive. Our competitors include:

We compete with biotechnology and pharmaceutical companies that develop, produce and market therapeutic compounds in the U.S., Europe and elsewhere. We face competition from a number of biotechnology and pharmaceutical companies with products in preclinical development, clinical trials or approved for conditions identical or similar to the ones we are pursuing. Other companies engaged in research and development we face intense competition from include:

The competition listed above was selected based upon identifying those companies that we feel have business models, are developing drugs or have drugs approved for therapeutic indications that are similar to the ones we are pursuing.

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A number of organizations are attempting to rapidly identify and patent genes and gene fragments sequenced at random, typically without specific knowledge of the function of such genes or gene fragments. If our competitors discover or characterize important genes or gene fragments before we do, it could adversely affect our ability to commercialize our products. We expect that competition in genomics research, protein therapeutics, and therapeutic antibodies will intensify as technical advances are made and become more widely known. In addition, a number of competitors are producing proteins from genes and claiming both the proteins as potential therapeutics as well as claiming antibodies against these proteins. In many cases generic antibody claims are being issued by the United States Patent and Trademark Office (“USPTO”) even though competitors have not actually made antibodies against the protein of interest, or do not have cellular, animal, or human data to support the use of these antibodies as therapeutics. These claims on proteins as therapeutics and these claims covering all antibodies against the proteins and methods of use in broad human indications are being filed at a rapid rate, and some number of these claims have issued and may continue to issue. In addition, purified proteins, therapeutic data, and antibodies, including polyclonal antibodies, mouse monoclonal antibodies and, in some cases, fully-human monoclonal antibodies, are being generated against a large number of targets within the human genome. All of these activities may make it difficult to commercialize products, or, if licenses are made available, may make the royalty burden on these products so high as to prevent commercial success.

We may engage in acquisitions that are unsuccessful.

In the future, we may engage in acquisitions in order to exploit technology or market opportunities. We are not experienced in acquiring and integrating new businesses. If we acquire another company, we may not be able to integrate the acquired business successfully into our existing business in a timely and non-disruptive manner or at all. Furthermore, an acquisition may not produce the revenues, earnings or business synergies that we anticipate. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected. In addition, acquisitions can involve material non-recurring charges and amortization of significant amounts of non-cash acquisition costs that could adversely affect our results of operations.

If our patent applications do not result in issued patents, then our competitors may obtain rights to commercialize our discoveries.

Our business and competitive position depends on our ability to protect our products, processes and technologies. We continually file patent applications for our proprietary methods, novel uses of genes, and our development products. As of the date of this report, we had been issued approximately 79 patents with respect to aspects of our gene portfolio, products, processes and technologies.

Our commercial success also depends in part on obtaining patent protection on genes and proteins for which we or our collaborators discover utility and on products, methods and services based on such discoveries. We have applied for patent protection on novel genes and proteins, novel mutants of known genes and their uses, partial sequences of novel proteins and their gene sequences and uses, and novel uses for previously identified genes discovered by third parties. We have applied for patents on antibodies against the proteins we have discovered, as well as seek or have our partners seek patent protection on the antibodies we produce against these proteins. We have sought and intend to continue to seek patent protection for novel uses for genes and proteins and therapeutic antibodies that may have been patented by third parties. In such cases, we would need a license from the holder of the patent with respect to such gene or protein in order to make, use or sell such gene or protein for such use. We may not be able to acquire such licenses on commercially reasonable terms, if at all. Our patent application filings that result from the identification of genes associated with the cause or effect of a particular disease generally seek to protect the genes and the proteins encoded by such genes as well as antibodies raised against these gene products. We also seek patent protection for our therapeutic, diagnostic and drug screening methods and products.

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In 2001, the USPTO issued new guidelines for patent applications reflecting the USPTO’s current policy regarding statutory written description and utility requirements for patentability. The implementation of these new guidelines may cause the USPTO initially to reject some of our pending new gene and protein patent applications. There is no guarantee that the USPTO will approve them. We strive especially to gain issued patents for our commercially important genes and proteins.

The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. Our patent applications may not protect our products, processes and technologies because of the following reasons:

In addition, patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of our technologies, or, if patents are issued to us, design around the patented technologies developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

The issuance of patents may not provide us with sufficient protection.

We may not be able to obtain further patents for our products, processes and technologies, or, if we are able to obtain further patents, these patents may not provide us with substantial protection or be commercially beneficial. The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. A patent could be challenged by litigation and, if the outcome of such litigation were adverse to the patent holder, competitors could be free to use the subject matter covered by the patent, or the patent holder may license the technology to others in settlement of such litigation. The invalidation of key patents owned by or licensed to us or non-approval of pending patent applications could increase competition, and materially adversely affect our business, financial condition and results of operations. In addition, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. Third parties have indicated to us that they believe we may be required to obtain a license in order to perform certain processes that we use in the conduct of our business or in order to market potential drugs we have in development.

We cannot predict whether our or our competitors’ pending patent applications will result in the issuance of valid patents. Litigation, which could result in substantial cost to us, also may be necessary to enforce our patent and proprietary rights and/or to determine the scope and validity of others’ proprietary rights. We may participate in interference proceedings that may in the future be declared by the USPTO to determine priority of invention, which could result in substantial cost to us. The outcome of any such litigation or interference proceeding might not be favorable to us, and we might not be able to obtain licenses to technology that we require or that, if obtainable, we could license such technology at a reasonable cost.

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The public availability of genomic sequence information or other sequence information prior to the time we apply for patent protection on a corresponding full-length or partial gene could adversely affect our ability to obtain patent protection with respect to such gene or gene sequences. In addition, certain other groups are attempting to rapidly identify and characterize genes through the use of gene expression analysis and other technologies. To the extent any patents issue to other parties on such partial or full-length genes or uses for such genes, the risk increases that the sale of potential products, including therapeutics, or processes developed by us or our collaborators may give rise to claims of patent infringement. Others may have filed and in the future are likely to file patent applications covering genes or gene products or antibodies against the gene products that are similar or identical to our products. Any such patent application may have priority over our patent applications. Any legal action against us or our collaborators claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license in order to continue to manufacture or market the affected products and processes or could enjoin us from continuing to manufacture or market the affected products and processes. There can be no assurance that we or our collaborators would prevail in any such action or that any license required under any such patent would be made available on commercially acceptable terms, if at all. We believe that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in such litigation, it could consume a substantial portion of our managerial and financial resources.

There is substantial uncertainty concerning the extent to which supportive data will be required for issuance of patents for human therapeutics. If data additional to that available to us is required, our ability to obtain patent protection could be delayed or otherwise adversely affected. Although the USPTO issued new utility guidelines in 1995 that address the requirements for demonstrating utility for biotechnology inventions, particularly for inventions relating to human therapeutics, there can be no assurance that the USPTO examiners will follow such guidelines or that the USPTO’s position will not change with respect to what is required to establish utility for gene sequences and products and methods based on such sequences.

We cannot be certain that our security measures will protect our proprietary technologies.

We also rely upon trade secret protection for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. We have developed a database of proprietary gene expression patterns and biological pathways which we update on an ongoing basis and which can be accessed over the Internet. We have taken security measures to protect our proprietary technologies, processes, information systems and data and continue to explore ways to enhance such security. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. While we require employees, academic collaborators and consultants to enter into confidentiality and/or non-disclosure agreements where appropriate, any of the following could still occur:

We depend upon our ability to license technologies.

We may have to acquire or license certain components of our technologies or products from third parties. We may not be able to acquire from third parties or develop new technologies, either alone or with others. Failure to license or otherwise acquire necessary technologies could materially adversely affect our business, financial condition and results of operations.

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The 454 Life Sciences technology platform is in development and the initial stages of commercialization.

The technology platform of 454, our majority-owned subsidiary (see “Business—454 Life Sciences Corporation”), is still in development and 454 has not had significant sales of its services or products. 454 may not be able to continue to successfully develop or commercialize the 454 technology platform. The success of commercialization of the 454 technology platform depends on many factors, including:

454 is subject to competition from organizations that have developed or are developing technologies and products to service 454’s potential customers.

Many of the organizations competing with 454 potentially have greater capital resources, research and development staffs and facilities and marketing capabilities. 454’s potential competitors include:

We believe that the future success of 454 will depend in large part on our ability to maintain a competitive position in instruments for the high throughput nucleic acid sequencing field. Before we recover development expenses for our products or technologies, such products or technologies may become obsolete as a result of technological developments by us or others. Our products could also be made obsolete by new technologies which are less expensive or more effective. We may not be able to make the enhancements to our technology necessary to compete successfully with newly emerging technologies. A market for the high throughput nucleic acid sequencing field may not be sufficient to generate revenues significant enough for 454 to achieve profitability.

Patents may not provide sufficient protection for the 454 technology.

454’s products and services are based on the combination of several complex technologies. 454 has developed some of these technologies internally and has pursued patent protection in the U.S. and other countries for certain developments, improvements, and inventions it has developed that are incorporated into 454’s products or that fall within its fields of interest. Other of the technologies of interest to 454 are owned by third parties and are used by 454 under license. There are relatively few decided court cases interpreting the scope of patent claims in these technologies, and 454 believes that its products and services do not infringe the technology covered by valid and enforceable patents. This belief could be successfully challenged by third parties. 454’s patent applications may not protect its products, processes and technologies because of the following reasons:

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454 could be subject to claims for infringing on patents of other intellectual property rights.